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You are born short housing - you need to buy or rent it in order to get neutral. And given the labor market, most people need to buy where they work. This cor

You are born short housing - you need to buy or rent it in order to get neutral. And given the labor market, most people need to buy where they work. This correlation is ~impossible to hedge (I guess you could short local industries, but a lot of these aren't public and there are a lot more covariates driving housing prices, from interest rates to embezzled overseas money). There's also a problem with hedging on an asset-price basis vs. a cash flow basis, which is even more difficult. Good thing CA is a non-recourse state, which means your mortgage comes with an embedded put option. When you consider the option value of the put, the option value of locking in interest rates (ie a call on a long-term zero-coupon bond), the inflation hedge, and potentially lower month-to-month costs (not unheard of, depending on your tax bracket) it makes it pretty easy to break even or minimize your losses even given a fairly bad story, over a 5-10yr period. This assumes you actually run the numbers. That's not even accounting for the consumption value of the house itself.

sytelus 11y ago
Couple of things that seems incorrect: 1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area. 2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.
- fiatmoney 11y ago
  When I say "born short housing", I mean you must acquire housing of some kind in order to just exist in society. It's not a "housing / no housing" choice, it's a "buy / rent" choice wherever you are.
- jdmichal 11y ago
  > You are not born short housing. That must have been a fun birth... I'm guessing C-section? More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one. Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.
chermanowicz 11y ago
Spoken like a true economist (not that this is a bad thing). I agree with your first point, but I think you're wrong about the put option. It is not easy to "break even or minimize your losses" at all. Only if you're putting no money down would this be even close. Real estate is illiquid by definition and post 2008 nearly every foreclosure lost 100% of the equity built (and a major impact on your credit score).
- fiatmoney 11y ago
  Right, I'm looking at it as one component of an overall cash flow & asset portfolio. It's easy to construct a scenario where it doesn't pay off - deflation that hits incomes, house prices, and rents is an easy one. But, as one component of an overall portfolio it has certain characteristics that help you hedge other risks you're exposed to in a way that not a lot of other asset classes can. This still requires that it isn't "too" expensive even given those other benefits.
- deleted 11y ago
  [deleted]
- dllthomas 11y ago
  More finance than econ, to my ear. Not that this is a bad thing.

sytelus 11y ago

Couple of things that seems incorrect: 1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area. 2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.

fiatmoney 11y ago
When I say "born short housing", I mean you must acquire housing of some kind in order to just exist in society. It's not a "housing / no housing" choice, it's a "buy / rent" choice wherever you are.
jdmichal 11y ago
> You are not born short housing. That must have been a fun birth... I'm guessing C-section? More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one. Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.

chermanowicz 11y ago

Spoken like a true economist (not that this is a bad thing). I agree with your first point, but I think you're wrong about the put option. It is not easy to "break even or minimize your losses" at all. Only if you're putting no money down would this be even close. Real estate is illiquid by definition and post 2008 nearly every foreclosure lost 100% of the equity built (and a major impact on your credit score).

fiatmoney 11y ago
Right, I'm looking at it as one component of an overall cash flow & asset portfolio. It's easy to construct a scenario where it doesn't pay off - deflation that hits incomes, house prices, and rents is an easy one. But, as one component of an overall portfolio it has certain characteristics that help you hedge other risks you're exposed to in a way that not a lot of other asset classes can. This still requires that it isn't "too" expensive even given those other benefits.
deleted 11y ago
[deleted]
dllthomas 11y ago
More finance than econ, to my ear. Not that this is a bad thing.